Magazine article American Banker

Bad-Asset Plan Ignites Rally; Its Longevity Doubted

Magazine article American Banker

Bad-Asset Plan Ignites Rally; Its Longevity Doubted

Article excerpt

Byline: Katie Kuehner-Hebert

Though bank stocks and the broader markets soared Monday after the Treasury Department released details of its public-private partnership plan to buy banks' toxic assets, analysts questioned whether the rally is sustainable, particularly ahead of first-quarter earnings reports.

The KBW Bank index surged 18.59%, and the Dow Jones Industrial Average and the Standard & Poor's 500 index rose 6.84% and 7.08%, respectively, after Treasury Secretary Timothy Geithner disclosed long-awaited details of his plan to deal with the industry's bad assets. The government said it would use up to $100 billion from the Troubled Asset Relief Program to leverage private capital and buy $500 billion worth of bad assets from banks. The program could expand to $1 trillion.

Despite the bullish response, key questions remain.

"The market is responding to the Treasury secretary's plan, but we still don't know how the pricing mechanism would actually work, and we don't know whether there's really adequate juice to entice holders of these assets to actually sell them," said Gary Townsend, the chief executive of Hill-Townsend Capital LLC. "If a bank is offered less than it feels ... its asset is worth, they are not going to sell it. It's still not clear to me that, without the Treasury actually directing sales, a whole lot of assets are going to be sold in this program."

Analysts also have expressed fears that the recent rise in bank stocks, fueled partly by positive financial forecasts by Bank of America Corp., Citigroup Inc. and JP Morgan Chase & Co. earlier this year, is setting investors up for a fall. Much of the resurgence in these shares stems from new growth in fixed income trading, while only a few regional banks have such platforms.

Stocks may slide once investors begin to see how the plan shakes out, Townsend said. …

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